Analysis of the effect of defense and government expenditures on unemployment dynamics in Turkey: An ARDL approach

This study aims to analyze the short and long-run effects of defense expenditures, government expenditures and gross domestic product (GDP) on the unemployment rate in Turkey for the period 1995-2022. Unemployment is considered to be one of the most important structural problems of the Turkish economy and the impact of public expenditures on employment has been addressed in a limited number of studies in the literature. Therefore, this study aims to fill the gap in the literature with an integrated approach that evaluates these three variables together. In the study, ARDL (Autoregressive Distributed Lag) model is applied using annual data. In the model, unemployment rate is taken as the dependent variable, while military expenditures, government expenditures and GDP are used as independent variables. ADF and Phillips-Perron unit root tests were applied to examine the stationarity of the variables and the long-run relationship was confirmed with the help of the bounds test. According to the findings, military expenditures reduce unemployment by 1.43% for a 1% increase, while GDP decreases unemployment by 0.006% for a 1% increase. On the other hand, the effect of government expenditures on unemployment is statistically negligible. The error correction term of -0.719 indicates that the system corrects its short-term imbalances by approximately 71.9% in the next period. The results are consistent with Military Keynesianism and Alliance Theory, which emphasize the employment-creating effects of military spending. The limited effect of GDP can be explained by the informal economy and structural problems in the labor market, while the ineffectiveness of government spending supports the Crowding-Out Theory. The findings reveal that the unemployment rate in Turkey hovers around a structural equilibrium at around 10%. In this context, policymakers are advised to restructure military expenditures with a focus on production and employment, redirect public expenditures to strategic areas, and develop policies to support economic growth and the labor market in a coordinated manner.